Sunday, March 01, 2009

SUMMARY:- Some economic data breaks the string of worsening results, but market does not.- Q4 GDP revision tanks further, Q1 to be worse.- Chicago PMI, Michigan sentiment post modest improvement after, starting the watch for others to show the same.- Credit markets, having thawed post TALF, freeze once more on fiscal initiatives.- Market on the ropes looks to NASDAQ to save it but it will take more time with this break of support.

Tuesday rally attempt fails on Friday.

Friday was the first day the Tuesday rally attempt could look for a follow through session, i.e. another strong upside session to show buyers were still interested.

It had its work cut out. GDP was nothing short of hideous. Michigan sentiment and Chicago PMI bettered expectations by a tad, stemming the negative tide of the past few weeks, but just a bit. The economic data is bad, but that is not the real issue. That the data is bad is no surprise. The market is not tanking when it hears bad economic news. It has not tanked all during the consolidation on really bad economic data. As the indices came off the November low that was the strength: taking all the bad economic news thrown at them and still moving higher.

The problem now is the next set of events supposed to help cure the prior problems. The stimulus package, the bank plan (or the lack thereof), higher taxes proposed as of October 2009, and a budget and policies (e.g. nationalized healthcare, trade restrictions, cap and trade, carbon limits) hostile to those that make the jobs and pay the majority of the taxes even before the hikes to come. Who knew that $40M to remodel the Agriculture Department headquarters, Depression-era trade policies, nationalized healthcare, and thousands of pet projects are the cure to the frozen credit markets? Dick Morris calls it a war on prosperity. No, it is a war on our Constitution and our progeny.

THAT is what is now weighing on the market. The credit markets froze again in response. Friday on the heels of the budget release the market opened sharply lower, tried to rally, but we didn't think it would hold and it did not. Friday was a microcosm of the entire week: a weaker open Monday, a bounce attempt, then failure and new lows. We used Friday to buy some downside positions in anticipation of some more weakness to start next week.

TECHNICAL. Intraday it looked as if something could be brewing. A lower start then a move from negative to positive, but it could not hold. The indices closed not at session lows but given they started below key support levels, the late fade put them back below support at the close. New bear market lows for SP500 and DJ30. A new closing low for SP600. NASDAQ fell below its December lows.

INTERNALS. Breadth was nothing, at least compared to what it has shown on the wilder sessions of the week. Volume surged on NYSE as Citi traded 1.8B shares, over 7 times its average trade that has, of course, been on the rise since late November as it has been effectively liquidated since. NASDAQ volume was not up as much, but it was no slouch, posting the strongest advance of the week as NASDAQ gapped to a new post-November low then failed an attempt to recover. New lows were on the rise, but as with Monday the numbers were quite mild, coming in at the 300 range. That is impressive and a positive as new lows are a measure of the strength of selling. If most stocks refuse to hit new lows as the market revisits prior lows that indicates fewer stocks participating in the downside (meaning they are building bases), and thus the downside chokes itself off from lack of fuel.

CHARTS. New bear market lows on SP500 and DJ30, and they did it on some volume as the financials suffered piling on. That indicates more dumping of shares and dumping often begets more dumping. Still looking at those new lows, however. Don't want to forget that as the markets struggle into next week. SP500 hit a new bear market low after almost 5 months of consolidating. A break of a prior low often leads to a fairly quick drop after the breach and then a pretty quick test as well. NASDAQ broke its December low for the second time on the week. This action by both breaks the rally attempt on Tuesday. The downside door is open for techs, and with SP500 falling below its November low NASDAQ, with its umbrella-like pattern is very much in position to make the November low test itself. That will be the real test for the market and this 5 month consolidation attempt the formed following the LEH failure. We need to keep in mind that support levels are spongy and that the breaks by SP500 and NASDAQ are not massive. Thus even SP500 is not irreparably harmed by a modest new bear market low. It is not basking in the warm sun, but it is not a total collapse at all.

LEADERSHIP. This is just what the market needs to find. The problem with leadership is that it depends upon an assessment of the economic future. Over the past three weeks leadership by techs, chips, metals, energy and other sectors that could be touched by the at the time potential stimulus to come and an effective bank bailout has been splintered. The selling broke down many groups and the modest bounce Tuesday and the inability to drive higher after that set up some more downside. Some chips remain in good shape (MRVL, XLNX) and some consumer retail surprisingly remains solid (AMZN, TJX). On the other hand metals are down, most energy, and lots of tech have broken down. As NASDAQ tests its lows these groups or new groups need to hold and base out. Again the modest rise in new lows on this test needs to be kept in mind.

THE ECONOMY

Credit becomes even harder to come by.

A history lesson for Congress and the Administration.

I never thought I would see this kind of economic calamity and especially this kind of flatly wrong response to it again in my lifetime. I lived through the 1970's and the mistakes made and the economic pain that followed. While I would like to blame disco for all of the 1970's problems, it was but a symptom of how sick things were.

Every child always asks why is history important. The trite but true (albeit incomplete) answer is you have to learn from the mistakes and the successes of the past. What time has proved to me (and I guess that means history) is that adults should be required to take refresher courses because we don't put the kids in charge of making key economic and policy decisions.

The 1960's and the 'war on poverty' saw unprecedented government programs and spending aimed at righting the ills of the country. History. Seems there should be a little more Bible reading as Jesus himself said we cannot cure the world's ills and injustices. He was talking about you and me; he didn't even bother to go into government. It was a given that the government was the last place to turn to. Nonetheless we embarked upon it and that turned the Kennedy boom into recession.

Then we had the Nixon years where a supposed conservative embarked upon both liberal and conservative ventures, took us off the gold standard, froze wages, and generally rocked the economic world as much as the sixties rocked the social order. Notice the similarity to the Bush 2 era? Bush espoused conservative views and even some conservative policies, but then he would embark on huge government growth exercises such as Medicare part D. As I told my senators at the time, if President Clinton had proposed it they would have voted it down as a tax and spend government expansion. The result when you mix policies this way is a volatile and explosive gamble and it ended badly for Nixon and for Bush (and hence all of us).

Carter came in and controlled speed limits, initiated 'windfall profits,' raised taxes, gave away strategic areas (Panama Canal), turned his back on our only Middle Eastern ally, bankrupted the military, wore cardigans as he told us we were wasteful gluttonous bullies. Interest rates at 20%, double digit inflation, terrible jobs market. The birthplace of 'stagflation.' Those were great times. At least we could console ourselves listening to disco.

Reagan came in with the anti-Carter message, i.e. that the US was great and that we could be great again. He had a clear plan to cut taxes, provide incentives to invest in the US, and shrink government. The air traffic controllers did not like his policies and went on strike. He fired them all. He unleashed our economic power. Tax revenues surged to unbelievable levels as the economy exploded higher. Then he, along with Congress, spent every dollar and then some. Reagan's goal was to rev up the US economy and outspend the USSR in an arms race. It worked. Problem is, after we won Congress did not quit spending and with the boom that followed things would have been great but for Congress spending on even more programs without cutting any.

We are now in a 1970's like era. The Bush/Nixon connection that mixed principles and loused things up followed by the Jimmy Carter/Obama era that drives the stake home. There are ashes of socialism and communism dotting history's burn piles. Europe is more socialist than capitalist, and if it has 1% GDP growth its central banks get all nervous and want to raise interest rates to control the 'hot' economy. And we want to move to that model and guarantee mediocrity? Not for my kids, no thank you.

That is, however, the path we are being forced to follow as this crisis is used to pass legislation that pushes a strong socialist agenda, legislation that the democrats openly admit would never pass during normal times. The words of the Obama Chief of Staff continue to haunt us: 'don't let any good crisis pass without using it to pass what you could not otherwise pass.' 8,000 earmarks in the new budget but Obama doesn't oppose those because they were put in before he was President and so apparently they are sacred. It is business as usual. It is history as usual. We have learned nothing.

What about the credit?

This is exactly about the credit crisis, not to mention many other issues that arise from these policies. TARP and $4T in guarantees from the Fed helped start the credit thaw. Gains stalled and started to reverse, however, as TARP funds were redirected from the original plan. It took the Fed coming out with TALF, the facility to purchase and trade consumer loans and small business loans, to get credit markets on the mend again.

Immediately after TALF was announced Dollar LIBOR rates started back down and sharply so. The gains were across the board and the key 3-month rate was poised to fall below 1%, a key, key break. Then things changed. The plans of the new Administration on the stimulus started to shape up and they were not stimulus. Rates started to creep higher. The bank bailout announcement came and went with no plan announced. More creep. Then the speeches about taxes, social policy, nationalizing healthcare. Then the budget release crystallized how pervasive the planned Dick Morris' war on prosperity is.

LIBOR rates have exploded. Friday the overnight rate that was close to 0.10% prior to the stimulus bill shaping up, closed at 0.36% Friday, spiking from 0.28% overnight. The one-month has more than doubled from its low. The key 3-month is up to 1.26% after almost breaking 1%. These are huge moves for these rates and the cause and effect is pretty clear when you look, to the day, when the nice, steady declines stopped then started to reverse.

Now, as in the seventies when interest rates were at 20%, you cannot get the money you need to operate. In the seventies no one was going to pay those interest rates, if they could qualify, for taking a risk in starting a new business given the terrible non-growth in the economy. Right now you simply cannot get the credit because no banks can afford the risk to lend the money and not have it paid back. This is leading to the no growth scenario of the seventies only with a deflation scare versus inflation. For now it is more than no growth; it is negative growth as the economy contracts violently in response to the lack of credit and now to policies that are anti-growth.

But inflation is not out of the picture. There is massive money printing ongoing. The numbers we are accumulating in paper debt are incomprehensible to us. We simply cannot grasp how much money is being printed in order to try and inflate our way out of trouble. Unfortunately the spending gambit will fail to have the desired affect and thus we will have stagnation that won't be able to soak up all of those dollars with growth. That means a return of inflation as huge amounts of money chases the few goods a stagnant economy produces. It won't take much to turn from a worry of deflation to screaming inflation.

Again, I never thought we would see these types of economic problems again in my lifetime, but you could see it happening with a larger and larger government trying to control more and more of the economy and our lives. Bad policies were forced down the pipe such as the banks forced to lend to people who could never honestly begin to pay the money back. Interest rates were too low for too long and that further fueled the housing problems. What the government has not learned is that when you shove a lot of money into an area, the money sharks swarm and do whatever it takes to soak up all of those federal dollars. They are in it for the money alone and they work it hard until things start to dry up and then they are gone, leaving us to clean up the mess. Too much micromanaging and things always backfire. That is sadly another history lesson forgotten.

THE MARKET

MARKET SENTIMENT

VIX: 46.35; +1.69VXN: 45.28; +1.41VXO: 49.08; +2.52

Put/Call Ratio (CBOE): 0.98; +0.3. Right back up after my Thursday comments about low the ratio dropped.

Bulls versus Bears:

This is a reading of the number of bullish investment advisors versus bearish advisors. The reason you look at this is that it gives you an idea of how bullish investors are. If they are too bullish then everyone is in the market and it is heading for a top: if everyone wants to be in the market then all the money is in and there is no more new cash to drive it higher. On the other side of the spectrum if there are a lot of bears then there is a lot of cash on the sideline, and as the market rallies it drags that cash in as the bears give in. That cash provides the market the fuel to move higher. If bears are low it is the same as a lot of bulls: everyone is in and the market doesn't have the cash to drive it higher.

This is a historical milestone in the making. Bulls are impressively low considering we are in general a very optimistic country. The few bulls is a positive indication because it means most everyone that is getting out is out and there is money on the sidelines. In other words the ammunition boxes are full and as the market recovers investors will start opening up the boxes and firing. Little by little they will be forced to put more money into the market and there will be some rushes higher in fear they are missing the train. You relish times when sentiment is so negative because it means some tremendous buys are setting up. This could indeed be the opportunity of a lifetime, and you take advantage of it by buying quality stocks and letting them work for you as long as they will. If we can hold them for years, great.

Bulls: 28.6%. Another significant dive, down from 31.1% the prior week and the 35.2% it recovered to on the market rebound. Well down from 43.0%, the current top of the recovery as the market rallied off the November low. A rise from 25.3% in December and quickly starting to fall once the market encountered the January selling. Bullishness bottomed on this leg lower at 21.3% in November 2008. This last leg down showed us the largest single week drop we have ever seen, falling from 33.7% to 25.3%. Hit 40.7% on the high during the rally off the July 2008 lows. 30.9% was the March low. In March the indicator did its job with the dive below 35% and the crossover with the bears. A move into the lower 40's is a decline of significance. A move to 35% is a bullish indicator. This is smashing that. For reference it bottomed in the summer 2006, the last major round of selling ahead of this 2007 top, near 36%, and 35% is considered bullish.

Bears: 45.1%. Up sharply again, rising from 41.1% last week and 36.3% the week before. Hit the 34's on the lows, falling from 38.5% and 46.2% in mid-December. Still above the 35% level considered bullish for stocks, but as with bulls, still well below the level considered bearish for stocks. Bearishness hit a 5 year high at 54.4% the last week of October. The move over 50 took bearish sentiment to its highest level since 1995. Extreme negative sentiment on this move. 35% is the level that historically indicates excessive pessimism. As with the bulls the jump in bears did its job after hitting 44.7% in the third week of March. Bearishness peaked at 37.4% in September 2007. It topped the June 2006 peak (36%) on that run. That June peak eclipsed the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005). This is a huge turn, unlike any seen in recent history.

NASDAQ

Stats: -13.63 points (+0.98%) to close at 1377.84Volume: 2.518B (+7.13%)

Up Volume: 907.702M (+317.874M) Down Volume: 1.491B (-237.823M)

A/D and Hi/Lo: Decliners led 1.61 to 1Previous Session: Decliners led 1.58 to 1

Gapped lower below the December lows. Rallied back up to the December low but could not hold the move, fading back to close at the new post-November low. NASDAQ has cracked that support and as noted earlier in the week, that leaves the door open to the November lows. Support and resistance are flexible, however. They do not shatter when bumped or slightly passed. They do if there is a massive explosion through them, but that is not the case here. Thus NASDAQ could hold here, recover the December lows, and never look back. It has also closed the late November gap higher so that is out of the way. Can bounce, but in reality it will likely need to test the November low while SP500 falls further below its November low.

SOX (-1.10%) held up decently, but it gapped lower, rallied to tap the 10 day EMA and then faded back to close. Still showing a lower high below the 50 day EMA and the candlestick chart pattern from Wednesday to Thursday shows a 'dark cloud' and that is a pretty reliable indicator for a near term bearish move.

A new bear market low for SP500. Not a major crash through that level so, as noted earlier, SP500 can still make a stand in this general area. It can but thus far there have been 9 down sessions in the past 10. If anything there is an oversold bounce but a break of key support often leads to a quick run lower before a quick rebound to test. Not expecting SP500 to suddenly turn and blast into a new rally, but instead NASDAQ comes down and tests its November low while SP500 tries to get back on its feet. That may take a drop down near 675, dome highs from 1996 to find those feet.

SP600 (-0.82%) gapped lower below the November closing low then rallied back. Couldn't hold it and faded to the open. New closing low for the bear market though not a new low. Hardly a pillar of strength even though it is still in the consolidation for practical purposes. At the lick log for this consolidation and it is trying to make a stand at that prior low. Said it many times before: small caps are economically sensitive and they are showing no sign of and economic pickup.

DJ30

New bear market low as the Dow slipped further lower below its 10 day EMA (7377), the near resistance. In an established downtrend and thus the 10 day EMA is acting as resistance as it moves lower and makes the occasional bounce higher. Not much use in looking for leadership from this puppy, at least not to the upside. The Dow is now at the early 1997 peak, but a slip lower toward 6350 in this renewed downtrend is likely.

The market could not rally Friday as the shorts found no reason to recover what with the policy assault on the week. Seems they are not too worried about any weekend announcement as nothing will really trump the rhetoric and the hostile budget from last week.

We moved into some more downside positions on the session to play some more potential weakness to start the week. The past two weeks opened negative, and with the indices unable to hold a rebound Friday and trading below their key support, a quick run lower it quite likely before they try another bounce.

Bigger picture NASDAQ remains in its consolidation though its pattern (a broad top in the consolidation) indicates a decline to test the November lows. No problem with that at this stage of the game given all that has transpired. NASDAQ stocks have to set up and base again before they really move higher and a test lower by NASDAQ provides time to make those bases. When the indices made this last decline they were basically saying more time would be required even if this is the consolidation that sets a bottom.

So right now we are playing for that NASDAQ test of its November low and general weakness in the other indices as well. Then we see what kind of bounce is generated, the first after the current test lower and the second after NASDAQ makes it to the November low.

This could be short circuited if some better news comes out about the announced fiscal and policy announcements. There are some key democrats making modest statements and hinting there is overreaching taking place, pretty major complaining given the President's popularity. But the polls show his popularity just slipped below that of Bush during Bush's first month in office; yes they keep that statistic. The polls also show that while Obama remains popular, his policies are not nearly as popular. Some mitigating statements might take some sting off from the week, but we doubt that any such comments will come soon. Obama just laid out his entire agenda for his term, and as his chief of staff stated last October, he is using the economic crisis to get it all in fast. This overreaching could backfire. That is all down the road, however.

For now we look for a drop early in the week, see if there are some other downside positions we can get in on, then if the drop comes we take the gain, button up the plays. While the decline continues we watch for the stocks that hold support and maintain decent patterns. If we get some really solid stocks and names holding up, we play them on a bounce back up. We are in a new phase of trying to set a bottom and as noted above, that means more time to set back up and try again for another move higher. The economic news is no longer upsetting the market, but the policy response is, and that is the sticking point for any move higher right now. Frankly, the market is showing remarkable strength in the face of comments and proposals that directly attack what our financial and economic system is used to. Some say that being more like Europe is not that bad. To that I respond, but we broke away from Europe over 200 years ago to do it our way. What way has worked best? The answer is clear.

Support and Resistance

NASDAQ: Closed at 1377.84Resistance:1387 is the 2001 low1398 is the early December 2008 low1428 is the mid-November 2008 low1434 is the January low (1440.86 closing)The 10 day EMA at 14341460 is the February low1493 is the October 2008 low & late December 2008 consolidation low.The 50 day EMA at 1516The 50 day SMA at 15201521 is the late 2002 peak following the bounce off the bear market low1536 is the late November 2008 peakThe 90 day SMA at 15371542 is the early October 2008 low1565 is the second low in October 20081569 is the late January 2009 peak1603 is the December peak1620 from the early 2001 low1644 from August 20031666 is the January 2009 peak1752 from 20041782 from August 20041786 is the November 2008 high. Key level.

Support:1316 is the November 2008 closing low1295 is the November 2008 low

S&P 500: Closed at 735.09Resistance:741 is the November 2008 intraday low752 is the November 2008 closing low768 is the 2002 bear market lowThe 10 day EMA at 772The 18 day EMA at 792800 is the March 2003 post bottom low804 is the low on the January 2009 selloff812 is the February low815 is the early December 2008 low818 is the early November 2008 lowThe 50 day EMA at 838839 is the early October 2008 low848 is the October 2008 closing low853 is the July 2002 low857 is the December consolidation low866 is the second October 2008 lowThe 90 day SMA at 866878 is the late January 2009 peak889 is an interim 2002 peak896 is the late November 2008 peak899 is the early October closing low919 is the early December peak944 is the January 2009 high

Support:722 is a December 1996 low673 is a June 1996 peak

Dow: Closed at 7062.93Resistance:7197 is the intraday low from October 2002 bear market7282 is the October 2002 closing low in the prior bear market.The 10 day EMA at 73777449 is the November 2008 low7524 is the March 2002 low to test the move off the October 2002 low7694 is the February intraday low7702 is the July 2002 low7867 is the early February low7882 is the early October 2008 intraday low. Key level to watch.7909 is the early January low7965 is the mid-November 2008 interim intraday low.The 50 day EMA at 80608141 is the early December low8175 is the October 2008 closing low. Key level to watch.8197 was the second October 2008 lowThe 90 day SMA at 83948419 is the late December closing low in that consolidation8451 is the early October closing low8521 is an interim high in March 2003 after the March 2003 low8626 from December 20028829 is the late November 2008 peak8934 is the December closing high8985 is the closing low in the mid-2003 consolidation9088 is the January 2009 peak

Support:7008 from February 1997 closing peak6489 from December 1996 closing peak

Economic Calendar

These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.